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What are typical fee structures for portfolio companies by private equity groups?

James Darnell
Profile Picture of James Darnell James, a partner at KLH Capital, is responsible for identifying, structuring and executing transactions; due diligence; financial analysis; and portfolio management. He is a member of the KLH Investment Committee and is responsible for all SBIC compliance. He serves on the board of directors for all KLH portfolio companies and is directly responsible for overseeing Federal Resource Supply Company.
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Q:

What are typical fee structures for portfolio companies by private equity groups?

A:

A private equity group has a lot of flexibility typically in how they collect fees or harvest value from a company in which they are invested. The form and structure of what those economics looks like varies, but the most typical structure is some type of current pay from the economics surrounding the invested capital. Therefore, if the private equity group invests $5 million in an organization, they may collect a 5% dividend or some kind of 5% preferred return on their investment, which would make a total of $250,000 a year of collectible income. This income may be called a dividend or interest income, but it is some type of current yield on their actual investment. That’s the first and most typical way a private equity group would receive money from the portfolio company.

The second way is what’s known as a management fee or board of directors fee. These are moneys collected by the private equity group as compensation for their time and resources that were spent working with the portfolio company. A good private equity group is going to spend up to 20 hours per month with their portfolio company at a partner level along with other analysts and upper management-level resources who are professionals similar to consultants, bankers and lawyers. The moneys collected as fees will be used to compensate those professionals for their time and energy in working with the company.

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